How do borrow costs and short rebate rates affect short position sizing?

How to answer

Short sellers must pay borrow costs (the fee to borrow shares) and forgo the short rebate (interest on short sale proceeds held as collateral). Hard-to-borrow stocks can have annualized borrow costs of 10-50%+ (vs. 0.25-0.5% for easy-to-borrow). This cost directly reduces the expected return of a short position. A short with 15% expected alpha but 10% borrow cost has only 5% net expected return, requiring a 3x larger edge to justify the same size as a long with 15% expected alpha. Position sizing must incorporate borrow costs as a drag on alpha: adjusted size = (alpha - borrow cost) / alpha × original size. PMs at Citadel monitor borrow cost changes daily — a stock's borrow cost spiking from 1% to 20% can make a previously attractive short uneconomical and trigger immediate size reduction.

Key idea: Borrow costs eat into short alpha — size shorts based on net-of-borrow expected return.